Aggregate Liquidity and Banking: The Role of Loan Commitments and Liquidity Constraints
AbstractAccess to short-term credit is an important source od liquidity for firms. This article shows that the usual asymmetric information problem in credit markets can result in an oversupply of trade credits, eventually leading to overproduction of liquidity and underinvestment in log-term projects. Banks help to solve this problem. They arrange a fixed credit line (or loan commitment) with a firm which constrains its borrowings even if it runs into difficulties. Hence, in the aggregate, banks reduce liquidity for the benefit of an increase in long-term investments. This model thus offers another view on the liquidity transformation function of banks.
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Bibliographic InfoArticle provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.
Volume (Year): 155 (1999)
Issue (Month): 3 (September)
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Web page: http://www.mohr.de/jite
Postal: Mohr Siebeck GmbH & Co. KG, P.O.Box 2040, 72010 Tübingen, Germany
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
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- Mitusch, Kay, 2002. "Debt contracts, banks, and aggregate liquidity," Economics Letters, Elsevier, vol. 74(2), pages 145-150, January.
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